Up Ahead: Baby Steps Reforms

As the days go by it is becoming clear to me that though there will be a reforms burst after the Presidential elections. At the same time, one can't expect radical reforms. Diesel price hikes will correct some of the madness going on due to months of inaction. In the insurance and mutual funds industry, there might be some moves to get the distributors interested. I am not sure whether that will be enough. One can practically rule out any kind of fiscal stimulus since government doesn't have anything in its bag and is lagging way behind in revenues.Some forward movement in single brand retail, pensions and GST, even a firm date of GST implementation next year will help matters. There are two areas where the government will be keeping its fingers crossed  and both deal with inflation. It will hope that the monsoon isn't too bad. It never is perfect and whenever it is too good our country can't handle it with floods and waterlogging give everyone a hard time. Incidentally, what a sad situation it is for an aspiring economic superpower to be dependent on monsoon? That's basically depending on good luck, by the way! If the government can get the bureaucracy to act on the files instead of sitting on them, it will also constitute reforms in my eyes! The other aspect of inflation that the government will be banking on is the base effect of the indices. This will give people an illusion that things are getting better. Of course, the larger question is, are they? For an answer just try buying vegetables and groceries. The high and still rising prices will make you laugh in exasperation. Did anybody say live entertainment?  

Why Manmohan Will be More Effective than Pranab Mukherji

I am putting up a post here after some days. Much of the reason has been the lack of anything new or significantly different happening that would make me react. However, anybody who has been following my posts would realise how accurate my reading was about a reforms burst after the presidential elections. Manomhan Singh, the country's PM and the new Finance Minister is preparing for the burst. From what I have come to know and realise, there would be a burst of moves at the end of July. Expect this to continue up to November. Diesel price hike and pensions bill apart from Good and Services Tax (GST) clearly seem to be on the agenda. However, what I find interesting are the reports coming in the media that the PM was getting held back by the FM, Pranab Mukherjee in his reform push. Well, there is some truth in it I suppose. You can out it down to their different DNA. The PM is essentially an economist while the former FM is a politician despite his training of an economist. During his 1991-95 stint as FM, Manmonhan Singh's job was constantly eyed by Pranab Mukherjee. Nobody may now talk about it now but I have seen the fate of some people I know (economists) close to Pranab Mukherjee who were banking on him to get the chair. But that didn't happen despite the Harshad Mehta scam in 1992 when by the year-end Manmohan Singh showed his readiness to resign. Prananb had to be content with a portfolio like Commerce. Also, during that period Pranab's rehabilitation in Congress after his brief exile wasn't complete. I think it was only after he did quite a few dirty but effective jobs in leadership and other purges that he won the confidence of the top prty leadership. In UPA-II, he had argued internally that he was getting old and couldn't travel around, something needed in external affairs, his former portfolio. Once finance portfolio was given, it allowed him to chair the huge number of GoMs though one has to salute his ability to work hard. Will his exit make a difference? I suspect yes. Cocktail of politics and economics is always needed and that is where Mukherjee's brand of management worked as it didn't let anything go out of hand. But right now is the time for hard choices and decisive actions. It needs an economist and a reformer which Manmohan Singh is. Of course, one can always argue that Manmohan Singh always reforms under duress and with the back on the wall be it 1991 or now. But then, it can never be too late, can it?       

Life After RBI's "No Rate Cut"

So RBI didn't cut rates yesterday and people all around were disappointed. It is not just people related to stockmarkets or corporates but even people like existing and new home loan and car loan borrowers. I don't blame people for expecting a rate cut very badly. When you are part of an economy that has been growing so fast, it is natural for people to extrapolate where they can reach if they continue to grow at the same rate. And then not to be able to do so can be a difficult reality to accept. My guess is that RBI in its Hyderabad brainstorming where they made plans on how to tackle an European contagion after a possible disorderly exit of Greece, had planned for many scenarios. By yesterday morning it was too clear from Greek election results that there was going to be no disorderly exit of Greece from the Euro which had for the time being, spared the world some serious pain.

RBI doesn't really have too much of headroom. For all its tinkering of rates, it has not been able to do too much on its number one objective: inflation control. And how can it be effective? Monetary policy has to work in tandem with fiscal policy and normal policy implementation. I was interacting with a very senior and now retired FinMin official yesterday after a radio show that I moderated. He told me what we all know. The bureaucrats have stopped taking decisions and not acting on files. As I see it, RBI is saving its limited blessings for any nasty surprises that may spring from Europe in the future. Although the Greek mess, after the election doesn't look as menacing as some people have thought, it is the larger economies of Spain and Italy whose lack of access to capital markets in the future is what may create more headaches for all across the globe. In this backdrop, can people expect anything positive in the days to come? Well, I will just point to my last post. I continue to believe that there will be a renewed reforms burst during August-November 2012 just after the Presidential elections. Of course, Pranab Mukherji needs to win that election. I suspect that there will be some serious progress made in Direct Taxes Code and Goods and Services Tax areas along with pensions reform. These are areas where the major opposition party, the BJP, has chaired Parliamentary Committees and made recommendations in favour of reform. Their party persons seem to be quietly resurrecting DTC and GST.  We can even have progress on  FDI in aviation. If the government can get an FDI hike in insurance to 49 per cent, it will be a bonus. Thanks to a higher base effect inflation figures may not look that disturbing.. Is this what I want to see happen or is this more likely to happen in my view? I think I will emphasise on the latter.

Reforms Burst during August-November 2012?

Let me begin by saying how proud I feel on hearing that the government has contingency plans in case of more global madness if Greece exits the EU. Wow! Something is working in the government at last! But such plans can at best contain damage from the contagion that will follow and can not insulate India. It is not the Greek exit that will matter so much but the sentiment of panic that will spread across the globe that will be the greatest threat to all countries. Stockmarkets, banks, every economic activity that is bound to be affected. Lenders will have even lesser confidence in weaker European economies like Spain, Portugal and Italy and their access to capital markets will effectively get denied thanks to risk premiums demanded, something that is already happening with Spain.

Back at home, the Congress party has asked the Government  to pull up its socks. Somebody needs to tell these wise people that in the last six months no effort has worked. Haven't they heard of Newton's first law of motion which talks of bodies being in permanent state of inertia or motion unless acted upon? Once you go into a slumber it is difficult to get out, especially when your allies and the opposition want to ensure that you end up doing nothing. So does this mean that this will continue for the next two years till fresh elections happen? I am talking aboit a lack of reforms that is impacting the economy big time. Let me say what I think might happen till 2012-end from now on.

Once the  Presidential elections get over in July, you can expect a short reforms burst during August- December 2012. Government wants to do it badly. In December, many states go to the poll. This probably the last time the UPA II will be able to reform anything. What could happen during this period? Well, with the support of Samajwadi Party, government is likely to raise diesel prices somewhat. This will not be too difficult. Any hike will help. The government can raise Rs 4 and then roll it back to Rs 2 under pressure from official and unofficial allies. We now have a rich history of rollback starting from the time of Yashwant Sinha,  finance minister during the NDA regime. Second is likely to be the Pension Bill as it can bring in large amount of long-term foreign money. BJP supports the legislation and the Parliamentary Standing Committee had its own Yashwant Sinha chairing it. With some more tinkering TMC might be pacified. A 26 per cent foreign stake is not a bad start. It will bring some more dollars. Then, FDI in civil aviation could open up. the whole sector badly needs it. What else? Well, my hunch takes me only this far and then we shouldn't be too greedy, should we? From 2013 onwards, you can expect little on the reform front with all focus on being re-elected. I don't expect any of the principal political parties to be come out entirely happy with the year-end elections. Then, that's a topic for another day.

P.S By the way, Nouriel Roubini, "Dr Doom" does have many nice things to predict in 2013. A google search will help in reaching videos and articles. http://www.roubini.com/analysis/174887.php. All the stuff got uploaded yesterday

India is Not Alone: Global Slowdown Woes

Back in Delhi after an outstation trip, I must say the first two days of the week brought little surprise or cheer to me in terms of developments in the economy or the markets. Of course, it is easier on everybody’s nerves not to see the rupee fall the way it did last week. While driving back from work yesterday, I heard something interesting on a radio show reviewing the stockmarkets for the day. It said that the rating agency Moody’s doesn’t see its India rating change due to the fall in rupee (this is an old news though). The reason:  Since India’s political leadershop doesn’t look well-placed to bring about the much-needed adjustments in the fiscal space it thinks that the rupee’s correction accurately reflects the country’s realities. Coincidentally, this is a line I and my co-authors took last week when we wrote the latest cover story of Outlook Money magazine (www.outlookmoney.com). The issue hits the stand today. Hopefully, our readers will like the cover story and will find it useful.  The other disconcerting news coming in is the slowdown in China. Over the weekend, I read an interesting New York Times article on the slowdown there. The link is given here. http://www.nytimes.com/2012/05/25/business/global/chinas-once-hot-economy-is-turning-cold.html?pagewanted=all. Then, there is a video link from the Financial Times http://video.ft.com/v/1660792089001/China-faces-difficult-choices. The China real estate and construction scene always looked dicey to me. But now things should be worrying. The other interesting update I have managed to get is about the Brazilian economy. Apparently, in that country as well the authorities have tried to cool things down and they are now looking at a growth rate of about 4 per cent. Like India, it needs further reforms. A recent Economist articles argues on the same line. Here is a Wall Street Journal article link on demand for Brazilian debt http://online.wsj.com/article/SB10001424052702303395604577434412657454798.html?mod=rss_markets_main. Before I sign off, I need to say I thoroughly enjoyed reading the recent Economist survey on retail banking http://www.economist.com/node/21554742.

Reality Check at Smartphone Outlets

The mobile phone market is undergoing transformation with the rapid proliferation of smartphones. Not surprisingly, Samsung which has come up with the most number of new offerings seems to have toppled Nokia from the top spot where it had found itself perched for long. The smartphone wave was not unexpected since with the spread of 3G services this had to happen. For a person looking for a new mobile handset after almost four-and-a-half years, I found my market research process has been educative and fascinating. The Nokia shops in Gurgaon, the Delhi suburb, where I stay have been far less crowded than what was the case when I bought my last handset. The gap in their product portfolio seems to be telling from this simple indicator. People don't seem to swarming single company stores too. The shopkeepers scoring well seem to be those who are selling handsets from different companies. In some of the shops I have visited in the last 45 days or so, there is no place to stand at any time of the day. You will find yourself elbowed around. Then, there is the fascinating world of mobile accessories. There is simply no end to what you can do with your mobile phone. Of course, while I might not use most of them but this gives customers like me a feeling of empowerment. That's not to forget that making a choice has become more difficult. I have seen that for myself with the amount of time it has taken me to get a fix on what I want and what I can afford. But a more important thing is that I realised that with this kind of proliferation of mobile phones and their accessories, there is little doubt that our future is, well, mobile. For a finance person, there can be little doubt that the next frontier is mobile money--financial transactions and financial information dissemination on the mobile. While some might kind argue that it is already happening. But I suspect  we have seen nothing yet. After mobile shops never used to sport the look they do today. Smartphones are really promising an exciting new and smart future for us.

A Problem Called Europe

Uncertainty over events in Europe and its impact on the European crisis continues to take a toll across the globe. In India, its impact on stockmarkets this week is clearly visible where despite the Finance Minister's clarification on GAAR (which to some is "half-hearted", if not half-baked") there have been downward moves in the market and less-than-required-enthusiasm. To me, the "euromess" if I am allowed to coin this has two important messages. First, to enjoy economic benefits of a economic union you need to have monetary and fiscal policies both under single control. Minus the fiscal levers and fiscal discipline, it is not very difficult to get into the kind of mess Europe has got into. For instance, tt is now common knowledge that all the members of EU have flouted their fiscal deficit many times during the period the Union has been around. Included in the list is Germany which at times pontificates to other nations. If you take a step back and take a hard look, you will see similarities between and Europe and India as well. While India's monetary authority has been taking action in the recent past in India we don't find matching contribution by the government on the fiscal front.

The second lesson from Europe is the more worrying one. Recent elections have thrown out governments that have been following policies of economic austerity. While there are eminent economists such as Paul Krugman who feel that these policies should have not been initiated in the first place since what was required was more good old Keynesian government spending to create jobs and not worry about deficits and inflation as some governments have, the message from the electorate is that if a government's policy doesn't work for people, it will be thrown out. But can people throw out a system be thrown out if it doesn't work? History is replete with examples be it Germany in early 1930's or many others when demagogues seized power after thwarting democracy, free speech and free markets, encashing on people's desperation. In Spain, it seems about 50 per cent of the youth are unemployed. Anybody in the know of the economic situation can tell that the current euromess and global financial crisis will not go away in a hurry. Thus, while it will be easy for political parties and politicians to seize power encashing on popular disenchantment, it will not be easy to deliver the moon they promise as there are no easy ways out of the mess. The danger lies in people getting disillusioned with existing systems altogether and we will have a global cesspool. If one reads accounts of Greeks reeling under the impact of austerity measures one would start realising the meaning of "lost generation". While in US the situation is better thanks to a lower unemployment rate, but profound changes are already happening to people and their lives. Popular media is documenting how people even in their 70's are continuing to work sometimes at half the pay, because they can't afford to lead the retired life. The other scary lesson from anti-austerity movements is that once people get used to certain things they will not be able to live without them. It will be difficult for politicians to convince people on matters of economics. For instance, how will you convince people in India to pay user charges for electricity, cooking gas and diesel? Who can? Try telling this to our legislators who dole out one freebie after the other to the public as if there is no tomorrow.